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Seattle Angel Investor Gary Rubens and I are co-organizing this event. We hope you can come.

If you are an angel investor, or a company looking for angel funds, you might like to come to this event.

Pitches & Beers

Event: “Pitches & Beers”

When: Wednesday, October 22nd, 6:00 p.m. to 9:00 p.m.

Where: SURF Incubator, 999 Third Avenue, Seattle, 7th Floor

The Idea Behind the Event: Connecting Angels and Companies

The idea behind the event is this: companies seeking funding spend a lot of time trying to meet angels. Similarly, angels spend a lot of time meeting with companies, shepherding deals to other angels, etc. The whole process is fraught with inefficiency and is very time consuming.

At this event, we will try to help connect the dots. We hope to have a good crowd of active angel investors. We also hope to have a bunch companies seeking angel funds in attendance. We will do a triage. Companies that want to pitch can pitch. The pitches will be short–10 minutes! If angels want more info, there will be a chance to share an Executive Summary or Pitch Deck and continue the conversation at a later time.

This should be fun event. Please tell folks about it. I hope to see you there!

One thing that is evident is the degree to which the Commission is currently acting based on incomplete information when it comes to developing policy with regard to Rule 506 offerings, including with regard to the accredited investor definition. As the Commission noted in the release for the final rule lifting the ban on general solicitation in Rule 506 offerings, it has
“relatively little information on the types and number of investors in Rule 506 offerings.” This makes it difficult if not impossible for the Commission to reliably measure the likely impact of any changes to the accredited investor definition. This should not be seen as an excuse for inaction, however. Rather, the Commission should take immediate steps to collect the data that would allow it to better assess its policy options going forward.

The Committee goes on to make 5 specific recommendations. I listed them in my last blog post.

The Discussion At the Last Committee Hearing

At the last Investor Advisory Committee hearing, there was a good discussion of this point about not having enough information to make an informed decision. I transcribed a part of the last hearing on this point. Here is how it went:

Joseph V. Carcello had this to say:

Could I just make a broader general point that I think is important for the staff. You know, this is an area where there’s a surprising lack of even basic descriptive statistics. What, for example, is the, you know, distribution of the size of investments that are made by individuals into Reg. D private placements? What percentage of these investments come in from accredited investors? What percentage come in from unaccredited investors under 506 who are relying on purchaser representatives? What do we know in general about the risk and return profile of private placement investments? What percentage of them even return the initial investments? What’s the variance? How does that compare to the risk and return that you would get in a, you know, index fund or what have you? These are basic descriptive statistics about the market as a whole that to the best of my knowledge really are lacking. And it seems that if we want to do the best possible job for all participants in the process, for the companies that are offering securities pursuant to Reg. D, for the investors that are buying, and for the intermediaries in the market, it would behoove all of us to get some of this basic data. And the only way we’re going to be able to get it is unfortunately if the Commission rolls up its sleeves and does, you know, survey work in this area.

To this, Barbara Roper responded as follows:

Thanks, Joe. And I would just add there is—one of the points that we discuss in our draft recommendation is this notion that the Commission is operating to a large extent in the dark in developing policy in this area. There is, for example, an acknowledged problem that many Reg. D offerings do not file Form D. We don’t know how many. There’s, because of the way the regulations are written, even for those that do file the form, there isn’t a closing form. So there’s a lot you don’t know about what they actually raised, and what then happened with the offering. And so we anticipate that included in our recommendation would be a restatement of our previous recommendation that the Commission approve the changes to the Form D filing requirement that would allow it to collect additional information to assess some of these issues. That staff has done work, you know, if you read the economic analysis in the General Solicitation Final Rule—you know, they’ve reported what they know, based on the information that they get from the—you know, from the forms that are filed. And it’s useful. But it is, by definition, an incomplete data set, and we don’t even know how incomplete. And also arguably not representative, since those issues that actually take the step of file are presumably sort of different from those that don’t. So, I think, absolutely, I agree, Joe, that there is a useful place for more data in this and that, as you know, that will be reflected in the recommendation that comes from our subcommittee.

Then James Glassman, Executive Director of the George W. Bush Institute, at about the 1:04 mark, said this:

In your comments you alluded to the fact that there could be an economic effect if there was a straight inflationary increase in the limits. I like to just second what Joe said about the importance of research. It would be good to do some economic research on what would be the effects if we made any changes at all on the economy; I think there would be some economic effects. I just want to say I think that the SEC tries to be diligent in these efforts but in general frequently in the dark about economic effects. I think it is important for the SEC to look at those kind of things. Here is an perfect example where we can do research, not just in the areas that Joe talks about, but in broader economic terms. I think that should be a strong part of the recommendations; we shouldn’t make changes unless we know what the effects are going to be or get a pretty good estimate of what they are going to be.

I do not think the committee or anyone else should be revising or recommending revising the definition of “accredited investor” until the economic impacts are understood.

How Many Future Jobs Will Be Vaporized?

So, for example, if we simply adjust the financial thresholds for inflation, and 2/3rds of currently qualifying angel investors no longer qualify–how many jobs that would otherwise have been created will not be? Shouldn’t we get a reliable economic estimate before we proceed?

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People have a lot of questions about what constitutes “general solicitation” or “general advertising” of a securities offering. My friend Luni Libes, for example, had some great questions on a recent post I wrote about state-level crowdfunding.

What Is General Solicitation?

The starting point for understanding general solicitation is Rule 502 of Regulation D. I’ve quoted in full the pertinent provision below. The below should be your starting point for any analysis.

(c)Limitation on manner of offering.Except as provided in § 230.504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

(1)Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

(2)Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;Provided, however, that publication by an issuer of a notice in accordance with § 230.135c or filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section; Provided further, that, if the requirements of § 230.135e are satisfied, providing any journalist with access to press conferences held outside of the United States, to meetings with issuer or selling security holder representatives conducted outside of the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, will not be deemed to constitute general solicitation or general advertising for purposes of this section.

As Keith Higgins of the SEC has said, the SEC has not defined general solicitation or general advertising. Instead, the SEC has provided examples of what constitutes general solicitation. Whether what you are doing constitutes general solicitation may be a question of fact.

“Listen, I think it’s a hard — it is a hard question, right? And, you know, the joke would be we’ll get to a definition of general solicitation right after we get — after one on insider trading. And of course there isn’t one. I think it will be hard. And we’re open to ideas but I think it will be hard to come up with a definition, a safe harbor for what’s a general solicitation and what’s not, because it’s one of those very gray areas.”

Implications of General Solicitation

If you generally solicit your offering, you will have to take additional steps to comply with the law.

If your offering is a Rule 506 offering, these additional steps will be:

Only taking money from accredited investors

Obtaining additional verification information from you investors. Meaning, you can’t rely on simple certification from the investors that they are accredited. They have to provide their tax returns or personal financial statements. It is also possible for them to provide you access to their tax returns from the IRS, and the IRS actually responds pretty quickly to these requests.

If you are conducting a state-level equity crowdfunding, and you generally solicit or generally advertise your offering, you may have blown your securities law exemption. The SEC takes the position that you cannot generally solicit or generally advertise your intrastate securities offering on the Internet, for example, because the Internet is necessarily interstate.

What Should You Do?

The most important think you can do in any securities offering is make sure you follow the rules. You need to be especially careful with communications about your offering on Twitter or Facebook or other social media. It is easy to inadvertently break the rules.